Corn market enters 2013 production season in bearish mood

• From a price perspective, unless there’s a recurrence of drought, it’s going to be hard to put $6.50 back on a new-crop corn price for a September delivery.
• We could very easily see a ‘4’ in front of this crop.

Some sense of parity appears to be returning to U.S. commodity markets, meaning a more bearish outlook for corn, says Chris Wheeler, vice-president of operations for AGrowStar, LLC.

“There are a lot of variables, and for the first time in three or four years we’re probably leaning towards a more bearish stance on corn, considering current planting intentions,” said Wheeler at the recent spring conference of the American Peanut Shellers Association, held in Albany, Ga.

“Unless we have a drought or some unknown demand, we’ll have lower prices, and demand will return to the market in some form.”

In Georgia, the corn acreage itself was the same from 2011 to 2012, says Wheeler, but the major difference is that there was a big jump in harvested acres this past year.

“Instead of abandoning a lot of acres, growers harvested as much as they could get their hands on to take advantage of high prices.

“That was coupled with the second highest corn yield in the U.S., with 180 bushels per acre from 310,000 harvested acres. That has never happened in Georgia to my knowledge.

“We also had the second-highest yielding corn farmer in the country at 374 bushels per acre,” he says.

It was a much different story in the U.S., however, with a big jump in acres and almost-record abandonment.

“The acres were there to make a big crop across the country last year, but we just couldn’t go and get it because of the drought.

“That was coupled with a very poor average yield in the U.S. Trendline yields are close to 158 to 160 bushels per acre, but we came in at about 123 bushels.

“The Southeastern farmer finally had high prices and good yields. That’s somewhat of an anomaly for corn. Whenever we have high prices, it’s usually because we have a drought in the Southeast and up North, and we don’t make anything here,” says Wheeler.

Two years ago, ending stocks for the U.S. were at almost 2 billion bushels, which is a 13-percent carryout, he says. Now, carryout is at 5.6 percent, which is close to an all-time low.

“So we are starting to ask the question of whether or not we have enough corn to get through the summer.

“In 2004-2005, we had a carryout of almost 20 percent, so you can see it has been a steady decline. That’s because of an increasing demand led by ethanol. Ethanol went from hardly anything to the current 5 billion-bushel consumption.”

On the yield side, the U.S. had been on a steady increase for about 30 years, says Wheeler.

Turned around last three years

“Now, however, we’ve been on a steady decline for the past three years from record yields. We have to change this if we’re going to feed the world.”

Usage has been rationed, he says. “The job of the market, with $7 corn, was to turn off demand.

“Ethanol demand has exploded in the past five years, but where most of the ethanol companies are located up the river system, we had poor quality corn this year.

“We saw a lot of high aflatoxin in the 2012 crop. Many of those companies have had to import corn into their own states because they can’t use what’s there.”

On a world level, corn production has been fairly flat over the past five to six years, but there’s a slight increase in usage, says Wheeler.

“We’ve seen standard-of-living increases in India and China, and the first thing people want to do when they get money in their pockets is to eat better, and they don’t want to give that up. We’ve got a world carryout of about 13 percent to get us through the year.”

This past year, there wasn’t much change in the Midwest in the amount of corn planted except in some states where it was lower, he says.

“The anomaly was 1.4 million acres in North Dakota — that’s really what saved the U.S. Non-traditional corn areas stepped it up with these high prices.

“Corn should move out of this area to the West Coast for export, but we’ve cut off exports with our high prices. Customers can go to South America and other places to get cheaper corn.

“So that corn flowed back into the Corn Belt, and no one was ready for it. All of the train cars were positioned in the wrong places, and logistically we had a huge issue to overcome in moving this corn crop.”

The Southeast saw an acreage increase and a bumper crop.

“The drought intensified in 2012 as we moved into the summer. Last year at this time, the Southeast and Texas were the hot spots for drought.

“Now, corn planting is getting later by the day because we can’t get into the fields due to too much moisture in a lot of areas. We’re definitely starting off better than last year.”

For a long time, says Wheeler, the price of corn was up near $7. But there has been a steady decline down into the mid-$5.50s, $5.75 and $5.80.

Trend has changed quickly

“That has turned off a lot of farmers in the last month. My company covers the Southeast, pulling grain from Alabama, Georgia, Florida, Tennessee, North Carolina and South Carolina. We’ve barely received a phone call in the past two weeks from anyone wanting to sell grain.

“We’ve got record amounts of grain on the books. When corn was $7 and wheat was $8 and $9, we were buying grain left and right. But this $1.50 drop in the market from previous highs has turned off a lot of growers.

“Wheat has dropped by $2, and we have a lot of wheat coming in from the Southeast. Some growers are ripping up the wheat and planting something else. Those guys didn’t contract when it was $8 or $9.”

The cotton market, on the other hand, has rebounded, and there is a lot of parity among commodities, says Wheeler. “Previously, it was a no-brainer — people were going to plant a lot of wheat and a lot of corn. Now, it may pay you to wait a little longer to see what gets you the best bang for your buck.”

One thing impacting the market is that China is the largest consumer, he says.

“Right now, they have about 55 percent of the world’s stock of cotton within the country’s border. If they release it to the market, cotton prices will come down sharply. Are they going to continue to be an accumulator, or will they slowly meter it out?”

There’s an expectation in Georgia of a sharp increase in corn acreage, with cotton taking a small hit, and peanuts showing a significant decrease. Wheeler, however, thinks cotton could continue to gain ground going into the spring.

“When guys in the Southeast plant their corn, they want to get it out of the field in July. If you look at the July corn futures, there’s a premium of $1.10 versus new-crop corn. For any corn grower in south Georgia and north Florida, there’s a huge premium for them to get it out of the field early and into the marketplace.”

Last year, 1.18 billion bushels of corn were harvested prior to Sept. 1 in the U.S., says Wheeler.

“Farmers have figured out if they go and get it, and get it soon enough, that the premium more than pays off. In extreme south Georgia and north Florida, there are even producers planting corn behind corn.”

For corn to compete with cotton, considering cotton’s current rally, it would require $5.75 for irrigated corn, says Wheeler. “The returns for corn are very similar now to cotton. Earlier, there was no discussion — farmers were planting corn.”

Midwestern analysts

Some Midwestern analysts are predicting that U.S. corn carryout could triple this year if trendline yields are realized. Kansas State University has a range of $6.50 down to $4 per bushel, and the USDA is projecting a season-average price of $4.80

“USDA is currently saying we’ll have about 97.5 million acres of corn. On the high side, people are guessing we might add one million acres to that. I hope we’ll see a return to less disappearance and a better crop with improved yields.

“If that happens, I’ve got a 16 to 18 percent carryout, and that jumps you up to 2 to maybe 2.5 billion bushels of corn. Historically, that tells us we’ll see a ‘4’ in front of the corn market, and corn will be relatively cheap.”

The South, says Wheeler, is not geared towards a crop the size it saw last year, or the one it’s expecting this year.

“That’s why farmers are contracting – solely to have a spot in line. Buyers have figured it out, and they’re sitting on the sidelines. I’ve got millions of bushels of corn sold, and I need to sell millions more.

“There is no home for the wheat right now. We have record amounts contracted, but we probably have an all-time low that is actually sold. The flour mills have an excess from last year, and they’re not interested in contracting anything.”

From a price perspective, unless there’s a recurrence of drought, it’s going to be hard to put $6.50 back on a new-crop corn price for a September delivery, says Wheeler.

“We could very easily see a ‘4’ in front of this crop. We’ve got a lot of pent-up demand, and we’re seeing a lot of interest from overseas in our exports.

“We can turn our exports back on rather rapidly. We think the USDA is over-estimating South America’s crop, and if that’s the case, China will start paying more attention to us.”

It’s going to be feast or famine this year on carryout, he says. “Either we’re going to set an all-time low, or we’re going to go back to where we’re very comfortable, and it all depends on Mother Nature.”